The Rich Are Getting Richer; So Are the Poor

“No matter your thoughts about the Occupy Wall Street movement, the protesters were right in at least one respect: The rich are getting richer, and the poor are getting poorer.”

Variations on this statement were repeated in dozens of blogs, commentaries, and even news reports in the past months. The claim comes via a Congressional Budget Office analysis that shows incomes for the top 1 percent of Americans growing by 275 percent between 1979 and 2007, while the lowest 20 percent saw their inflation-adjusted incomes grow by “only” 18 percent.

The numbers from the report are correct, but the assertions based on it are true only because of careful wording. While the “top 1 percent” had the highest growth of income, if broadened to include the top 20 percent (the usual way of analyzing such figures), the growth rate was a far less stratospheric 65 percent. This contrasts with about 40-percent growth for the middle three-fifths of all wage earners, and 18 percent for the lowest one-fifth.

Statistically, the lowest 20 percent of households are poor for one main reason: They don’t work as much. Among the causes are medical issues, disability, and bad incentives. Not surprisingly, households in the top 20 percent are far more likely to include people with jobs. Here’s how professor Mark Perry, a member of the Mackinac Center’s Board of Scholars and chairman of the economics department at the University of Michigan-Flint, described it:

American households in the top income quintile have almost five times more family members working on average than the lowest quintile, and … are far more likely … to be well-educated, married, and working full-time in their prime earning years. In contrast, individuals in low-income households are far more likely to be less-educated, working part-time, either very young or very old, and living in single-parent households.

More significantly, the “rich getting richer” storyline insinuates that the top 1 percent and bottom 20 percent include the same individuals over time. For example, as reporter Julie Mack writes, “Overall, the numbers show that the more affluent you are, the better you’ve done in the past three decades.” Note how this ignores the reality that many individuals who were in the poorest group years ago have long since moved up and out, while among the rich are many families who are literally nouveau riche—they’ve recently arrived from lower income levels.

That’s the risk of relegating real people into statistical categories. Economist Thomas Sowell explained it this way: “The actual empirical evidence cited has been about what has been happening over time to statistical categories turns out to be the direct opposite of what has happened over time to flesh-and-blood human beings, many of whom move from one category to another over time.”

Data that tracks real people show that Sowell is correct. For example, as reported in The Wall Street Journal, IRS tax-return data shows that individuals in the bottom one-fifth back in 1996 experienced income growth of 91 percent by 2005. In contrast, individuals in the highest one-fifth saw their incomes increase just 10 percent over the same period. Incomes of households in the top 5 percent and 1 percent actually declined, by 7 percent and 24 percent, respectively.

Anecdotally, this makes sense: For example, in 1985, my father was just out of college and probably in the lowest 20 percent. But by 2007 he had moved up. Such examples are commonplace, but are completely missed by statistical aggregates.

In the late 1970s, Steve Jobs was trying to expand a struggling computer company. Bill Gates was writing code and just beginning to start working on a personal computer. And one of the founders of Google, Sergey Brin, had just arrived as a six-year-old immigrant from the USSR. These are individuals who did not enter that top 1 percent until many years later—in the process displacing former “one percenters.”

It was these individuals, not statistical categories, who created companies and wealth by making products people wanted. Establishing conditions in which individuals can move up the income ladder by creating, innovating, and building is what America is all about.

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Economic hope! Thank you – such hope has been long missing from the American conversation.

Whenever I hear a politician wanting to “punish” the rich with higher taxes, I think “What a mistake. We should be *encouraging* people to work hard instead of telling them that some day we’ll be punishing them.” This breath of fresh air shows that there’s hope for a brighter economic future.

noelfitz

Great article.

I am sure it will encourage all those who have lost their jobs and houses to realize that they are doing so well.

They may not have health insurance or enough food, shelter or security, but they, statistically, are getting richer.

GuitarGramma

Noel, what happened? Normally you compliment people for their kindness in contributing to a robust conversation. Why the sarcasm on this one? You don’t usually do that.

When I read the article, I did see hope. You can start out at a low income and move up. That’s what this article is about. It’s certainly what happened for my husband and me, and it’s what’s currently happening for our daughters.

I know that you are overseas, so you can only read about “how awful” it is here in the United States. I have to tell you that there are all sorts of social support systems, from the government to private and religious charities, that help people with food, shelter, and medical care. Some examples follow.

When my twenty-something daughter was fighting cancer and her health insurance was about to expire, a private charity helped her with paperwork that would provide for government-funded continuation of her medical care. In the end, she didn’t need the government’s help: Despite the “common knowledge” that private insurance companies are both heartless and ruthless, my daughter found a clause in her private insurance policy that allowed it to continue precisely because she was fighting cancer. For $50 a month, she received tens of thousands of dollars of medical care.

When my best friend of 50 years — who had never had health insurance — developed breast cancer, she was treated for free, through a government program, at one of the finest research hospitals in the country.

Here in the US we have a program called Section 8 which provides housing for those on welfare. I live right around the corner from a Section 8 apartment building. Granted, it’s not single family housing, but it’s a nice place in a good neighborhood. Further, there are numerous charities which provide food and shelter to the homeless while helping them get their lives together.

US law is currently madating 2 years of unemployment benefits for people who lose their jobs. I have friends who would certainly rather be working than drawing these benefits, but they are neither starving nor homeless.

I’m a mathematician by training, so statements like this — “individuals in the bottom one-fifth back in 1996 experienced income growth of 91 percent by 2005” — really speak to me. Translation? The poorest folks in the mid-90s had almost doubled their income ten years later. That’s good news! That ought to give hope!

I hope this article encourages people who are suffering economically. While food, shelter, and medical care are more critical than hope, a good dose of the latter is much needed in the American conversation.

noelfitz

GuitarGramma,

I am correctly reprimanded by you; all I can do is say sorry.

I think here we should try to be positive and build each other up, so my post was not in keeping with the ethos of this forum. I hope I did not offend anyone too much.

But these are difficult times in many countries and our present economic difficulties are paralleled elsewhere.

I am aware of the wonderful voluntary work done by so many people in America.

Here in Dublin we are in a small group of nine (four couples and a priest, which we call the community and we used to meet for 25 years for Mass and prayer in each other’s homes fortnightly. One couple spends the winter in Florida and there they co-operate with other volunteers to support elderly neighbors.

Thank you, Noel, for many things. It’s never easy to say that we’re sorry, thus I greatly appreciate that you have done so.

Thank you also for sending links to Mark Forrest and his foundation. What a tremendous couple and a foundation — as you say — that is deserving of our support.

Thank you further for adding a voice to Catholic Lane discussions that is always interesting. You certainly stretch me beyond my comfort zone on a regular basis — and that’s a good thing.

Happy Advent to you!
GuitarGramma

noelfitz

GuitarGramma,

thank you for your reply and good wishes.

Life is simpler when one admits mistakes and moves on.

Mark Forrest attended the same school as our sons, and I remember his wonderful singing at school celebrations. His father is also a excellent singer, and has joined Mark in some of his concerts in America. We are very fortunate to have him leading the singing in the House Masses we have been privileged to have for over 25 years.